RISK ASSESSMENT

Acceleration conditioned by public investment

Russia has recovered from the 2015/2016 recession. While growth may appear timid when compared against the rise in hydrocarbon prices, the expansion reflects the country’s economic capacity and the authorities’ desire to separate growth from oil wealth, which is subject to wide variations. To this end, and against the backdrop of Western sanctions, Russia adopted a fiscal rule in 2018 to reduce its non-hydrocarbon deficit and diversify the economy. In this context, the focus is on investment. However, household consumption (50% of GDP) will remain the main contributor to growth, expanding in line with the economy. Remuneration will benefit from tight labour market conditions, productivity efforts and increases in public wages (28% of jobs) and pensions. Credit growth, although slower, will remain comfortable, while the central bank could cut its key interest rate further (6.25% in December 2019) with inflation close to its target (4%). Investment (21% of GDP) is expected to contribute almost the same amount to growth by rising strongly, at least if the 13 national projects laid out by President Putin in 2018 get underway. Targeting roads, education and health, these projects aim to increase growth potential and reduce poverty (14% of the population lives below subsistence level and 65% of people receive assistance). Russia’s sovereign wealth fund (SWF) may provide financing for the projects, which will be three-quarters public. However, an overly great impact should not be expected, as the projects overlap with pre-existing initiatives and public expenditure has a weak multiplier effect. Moreover, despite measures to promote economic diversification, private investment, which is already squeezed by the size of the public sector (38% of reported value added with 32,500 companies), is unlikely to be vibrant. It has to cope with sanctions that include restrictions on access to international financing, while domestic credit to companies remains parsimonious and more expensive. While grain exports will benefit from the better 2019 harvest, oil exports will face flat prices and the production cap contained in the OPEC+ agreement, while other exports (ore, timber, basic and intermediate industrial products, transport equipment) will be affected by cooler global demand. At the same time, imports are set to grow faster, in line with domestic demand, despite encouragement to use substitute local products and increase local content.

Hydrocarbon-fuelled surpluses

The fiscal rule introduced in 2018, following on from those of 2004, 2008 and 2012, has been somewhat relaxed: it forecasts a primary deficit (no longer a balanced budget) over the 2019/2024 period based on an oil price of USD 40 (2017 price adjusted for US inflation). Additional government revenue generated by a higher Urals oil price is set aside as foreign assets in the national stabilisation fund. However, as the fund has exceeded 7% of GDP, money can be spent on public investments. Adoption of the rule was accompanied by fiscal consolidation, which enabled the crude oil price required for a balanced primary budget to be lowered from USD 110 in 2013 to USD 43 in 2018, while the non-oil deficit fell from 9.4% to 7%. Non-oil revenues represent 26% of GDP, while the rest are equivalent to 8%. These revenues are mainly used to finance current expenses including subsidies (7% of GDP). Public debt and its servicing are low, as the SWF was tapped during the recession. The external share represents 3% of GDP.

Even if it narrows, the current account surplus will remain high in 2020. Despite declining, the trade surplus (11% of GDP in 2019) linked to hydrocarbon exports (54% of total exports) will be considerable and will more than compensate for the deficit in services and income (oil and gas engineering expenses, Russians travelling abroad, dividends from foreign companies, transfers of foreign workers). Excluding hydrocarbons, the trade and current account balances would be negative at 3% and 8% of GDP respectively. Despite the efforts made since the application of sanctions, the substitution of domestic products for imports only goes so far, except in the agri-food sector. The financial account has become slightly negative (estimated at -1% of GDP in 2019). The Russian private sector has stopped deleveraging, while net foreign investment flows are negative. Private external debt has fallen to 24% of GDP, while growing foreign exchange reserves already stand at 18 months of imports and more than five times short-term debt.

Power fatigue and an uneven business environment

Vladimir Putin (67), who has been in power for 17 years, began a new 6-year term in May 2018. His popularity has been eroded by pension reforms. Demonstrations on an unprecedented scale have taken place in large cities, but also in small towns, to protest the barring of opposition candidates from running in the September 2019 local and regional elections, as well as corruption and economic difficulties. Despite a satisfactory rating in the Doing Business and Global Competitiveness reports (78/100 and 67/100, respectively), institutional performances (corruption, regulation, justice, insolvency treatment, protection of minority interests, random contract enforcement, patronage) need to be improved.)

Last update: February 2020

Payment

Bank transfers in Russia are among the most popular instruments used for non-cash payments, for both international and domestic transactions. This is because they are fast, secure, and supported by a developed banking network. Despite this, cash is still one of the most widespread payment instruments used by individuals.

Debt collection

Amicable phase

The amicable phase begins with the creditor contacting the debtor, either via written correspondence or phone calls. If an agreement is reached, a payment plan can be offered to the debtor. Charging interest is legally allowed but hard to enforce unless an agreement to pay said interest currently exists between the debtor and the creditor. Any such agreement must be additional to any standing agreement between the parties.

Legal proceedings

The Russian judicial system is comprised of three branches: the regular court system, the arbitration court system (headed by the Supreme Court), and the Constitutional Court (a single body with no courts under it; in Russian constitutional law this function is known as “constitutional control” or “constitutional supervision”, and deals with a certain number of disputes where it has original jurisdiction).

The regular courts have a four-tier hierarchy and are responsible for civil and criminal cases: the Supreme Court of Russia, regional courts, district courts, and magistrate courts.

The highest court of appeal is the Supreme Court of the Russian Federation.

Fast-track proceedings

Russian law provides for simplified proceedings for certain types of cases, in which the creditor seeks to recover no more than RUB 500,000 from a legal entity or RUB 250,000 from an individual entrepreneur. Under Russian law, judges are to consider cases through simplified proceedings within a maximum of two months form the day when the Arbitrazh (arbitrage) court receives the statement of claim or application. Once the deadline for submissions of evidence has passed, cases are reviewed on their merits by judges, without the parties being called to appear.

Ordinary proceedings

Proceedings are initiated when a creditor files a statement of claim with the competent Arbitrazh court. The court must decide within five working days whether to accept the statement, and subsequently schedule a preliminary hearing. Debtors are usually notified of claims when they are served with a copy of the statement of claim, which includes the data of the initial hearing. There is no specific time frame during which defendants must submit their defense, but it must generally be done before the hearing on the merits). The court can set a deadline for submitting a statement of defense – if this is not submitted, the court will consider the case on the basis of the available materials. The preliminary preparation period ensures that the case can be resolved on its own merits during one court hearing. Cases must generally be resolved on their merits within three months after the respective statement of claim is received by the court. More complex commercial disputes can take considerably longer. The courts will normally award remedies in the form of compensatory damages or injunctions but punitive damages are not available.

Enforcement of a Legal Decision

A judgment is enforceable for three years provided that is has become final. If the debtor fails to satisfy the judgment, the creditor can request compulsory enforcement of the judgment from the court’s bailiff services. Foreign judgments must be recognized as a domestic decision by the Arbitrazh Court

through the Russian exequatur procedure. Although Russia has signed a small number of reciprocal recognition and enforcement agreements with foreign countries, domestic courts are reluctant to recognize foreign jurisdiction clauses.

Insolvency Proceedings

Supervision

Commercial Courts initiate the supervision process to evaluate the debtor’s financial situation and to secure the debtor’s property. After examining a filed insolvency claim, the court initiates the supervision process. The debtor can autonomously request a court to initiate supervision if settling some creditors’ claims would make it impossible for the debtor to fulfil other obligations, if execution on the debtor’s property means the debtor’s business has to cease, or if the debtor’s business is insolvent. A receiver is appointed, known as a temporary manager, who must approve certain transactions during the supervision, such buying or selling more than five percent of the accounting value of the debtor’s property.

Financial rehabilitation

The aim is to carry out any necessary measures to restore debtors’ solvency and settle their debts. The court and the creditors control the process. The application must include a rehabilitation plan that ensures the debtor’s obligations will be met. The court appoints a receiver to be the administrative manager, who supervises and controls the debtor’s affairs during the period of the financial rehabilitation. The administrative manager examines the debt repayment schedule and monitors any financial restructuring plans.

At least one month before the period of financial rehabilitation expires, the debtor must provide the administrative manager with a report on the results of the financial rehabilitation. Once the report has been examined, the manager must prepare an opinion on the extent to which debts have been paid and the financial restructuring plan has been achieved. The opinion is submitted to the court, which examines the results and either ends the proceedings, orders external administrator to manage the company, or declares the debtor bankrupt.

External administration

The objective is to restore the debtor’s solvency by applying special measures under an external administration plan, and to replace the debtor’s chief executive officer (CEO) with an independent external manager. Once the procedure begins, the court appoints a receiver known as the external manager, who must draft an external administration plan setting out the measures necessary to restore the debtor’s solvency within the period of the external administration procedure. At the end of the period, the manager prepares and submits a report to the creditor’s meeting, together with a proposal of one of the following four options:

end judicial proceedings, if all creditors have been settled;

extend the period;

end external administrator, as the debtor is now solvent;

enter administration and file for bankruptcy.

Amicable arrangement

Debtors and creditors may make an amicable arrangement to adjust debtors’ liabilities on negotiated terms during any rescue procedures. Generally, an amicable arrangement ends the powers of court-appointed receivers. If a debtor fails to comply with terms of an amicable arrangement, creditors are entitled to ask for a bailiff to execute the agreement.

Insolvency

The purpose of insolvency is to sell the debtor’s property and use the proceeds to pay creditors’ claim in proportionate amounts. The court may initiate the process during supervision, financial rehabilitation, or external administration. It appoints a receiver (insolvency manager) to replace the debtor’s CEO. The court and the creditors control the activity of the insolvency manager, who must provide progress reports. At the end of the proceedings, the court reviews the list of satisfied and unsatisfied claims. If they are fully satisfied, the court rules the proceedings complete and the debtor is liquidated. If they are not satisfied, proceedings are terminated, the debtor company is dissolved, and unsatisfied creditor’s claims are to be written off.